High insurance prices, cotton wavering

FFAGENTS

March 04, 2011

3/2/11 - While insurance prices finished forming during February, we were blessed to get some very high prices established for the 2011 crop year, with the highest prices ever for insurance price elections with $6.01 corn, $13.49 soybeans (beans in the teens), cotton at $1.23/lb, and spring wheat at $9.89 (only topped by 2008). Cotton also came in with a huge price of $1.23/lb, with all these prices likely to attract acreage to the crop regardless of what prices do from here on out. That has to have farmers smiling when penciling out the 2011 crop this winter!

These high price elections essentially allow producers to lock in as high as 20- 25% profit margins for the 2011 crop on these major crops - perhaps the first time in history that producers have that opportunity to do so in March - at crop insurance sign up time. Rarely can farmers lock in profits - let alone 20% or more - without any risk. But that indeed is what we have in 2011, in spite of the increase of crop input prices as well this winter. Buying at high levels of insurance, while using the new low-cost enterprise unit structures, can effectively lock in put options on grains at about $5.10 corn, $11.50 soybeans, and $8.40 HRS wheat. Perhaps the best 85% put option is in cotton, with a $1.05 price virtually assured for the equivalent of their past 10 year yield history.

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This is indeed a rare opportunity, and one that creates an interesting dilemma for the marketplace now. Cotton last week formed what looked like a potential top, but this week roared back after some very negative technical formations (downside daily reversals), and instead finished today near the recent highs. That is quite an accomplishment for a market that already has doubled in the past 6 months! Will prices go even higher, providing even more opportunity for farmers in 2011???

We seem to be at somewhat of a crossroads in cotton. While the price action is dictating a possible top, the timing of this top would indeed be unusual as we aren't even close to planting the 2011 crop yet. We need to attract acreage to cotton to take care of what is a short crop situation in cotton, one where supplies are tight and we simply need to attract more acreage to the cotton crop in 2011. We also need to allocate out what is a short supply of remaining cotton for this crop year 2010, and limit demand somewhat by doing some demand destruction in the cotton market via high prices.

We may finally be in the process of doing this, but that seems like an inopportune time for prices to drop, too, very far. So here we are at the crossroads, with prices already very high but also with the market having very little leeway in allowing prices to drop much, either.

So the story marches on, with growers loving the high prices of today, enjoying what could arguably be the best situation in grain farming in a long time, or perhaps ever. While the projections look rosy this spring, it also seems like a time to reflect on the opportunities of the past, and to think about doing something to lock in these great prices.

For now, it might be a very easy choice to make in March, as effectively producers can lock in some very good price guarantees simply by purchasing up high levels of crop insurance coverage, and letting the chips fall where they may for the time being.

The best thing that could happen is prices continue going higher for now, perhaps into spring and early summer (corn/soybeans didn't top until late June 2008). Every dollar higher simply adds even more price to the profitability scheme, and as long as prices are still going higher, there doesn't seem like there is anything producers need to do. Just let the market run, until it gets just too good to be true. But if prices run up 10%, 20%, or 30% higher than crop insurance price elections, perhaps then it will be time to once again consider locking in some higher prices than already selected in crop insurance.

And who knows, even if prices top out at $8 corn this spring, we could still see $4 corn or even lower by harvest. Wouldn't that be the ultimate home run for 2011, harvesting an average crop in fall, having it sold for 20% above $6.01 corn, $13.49 soybeans, $9.89 HRS wheat, and $1.23 cotton - and then collecting $100-$200/acre in crop insurance proceeds because the price dropped hard into harvest. Talk about the ultimate double dip!!! It might just simply be dreaming, but if you are going to dream, you might as well dream big!!!